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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
6 Months Ended
Mar. 31, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Utility has a risk management policy that allows for the purchase of natural gas derivative instruments with the goal of managing price risk associated with purchasing natural gas on behalf of its customers. This policy prohibits speculation and permits the Utility to hedge up to 70% of its normal volumes purchased for up to a 36 -month period. Costs and cost reductions, including carrying costs, associated with the Utility’s use of natural gas derivative instruments are allowed to be passed on to the Utility’s customers through the operation of its Purchased Gas Adjustment (PGA) Clause, through which the MoPSC allows the Utility to recover gas supply costs, subject to prudence review by the MoPSC. Accordingly, the Utility does not expect any adverse earnings impact as a result of the use of these derivative instruments. The Utility does not designate these instruments as hedging instruments for financial reporting purposes because gains or losses associated with the use of these derivative instruments are deferred and recorded as regulatory assets or regulatory liabilities pursuant to ASC Topic 980, “Regulated Operations,” and, as a result, have no direct impact on the Statements of Consolidated Income. The timing of the operation of the PGA Clause may cause interim variations in short-term cash flows, because the Utility is subject to cash margin requirements associated with changes in the values of these instruments. Nevertheless, carrying costs associated with such requirements are recovered through the PGA Clause.
From time to time, the Utility purchases NYMEX futures and options contracts to help stabilize operating costs associated with forecasted purchases of gasoline and diesel fuels used to power vehicles and equipment used in the course of its business. At March 31, 2014, Laclede Gas held 0.4 million gallons of gasoline futures contracts at an average price of $2.76 per gallon. Most of these contracts, the longest of which extends to September 2014, are designated as cash flow hedges of forecasted transactions pursuant to ASC Topic 815. The gains or losses on these derivative instruments are not subject to the Utility’s PGA Clause.
In the course of its business, Laclede Group’s gas marketing subsidiary, LER, which includes its wholly owned subsidiary LER Storage Services, Inc., enters into commitments associated with the purchase or sale of natural gas. Certain of LER’s derivative natural gas contracts are designated as normal purchases or normal sales and, as such, are excluded from the scope of ASC Topic 815 and are accounted for as executory contracts on an accrual basis. Any of LER’s derivative natural gas contracts that are not designated as normal purchases or normal sales are accounted for at fair value. At March 31, 2014, the fair values of 149.2 million MMBtu of non-exchange traded natural gas commodity contracts were reflected in the Consolidated Balance Sheet. Of these contracts, 79.2 million MMBtu will settle during fiscal year 2014, 30.2 million MMBtu will settle during fiscal year 2015, 12.4 million MMBtu will settle during fiscal year 2016, 11.0 million MMBtu will settle during fiscal year 2017, 11.0 million MMBtu will settle during fiscal year 2018, while the remaining 5.4 million MMBtu will settle during fiscal year 2019. These contracts have not been designated as hedges; therefore, changes in the fair value of these contracts are reported in earnings each period.
Furthermore, LER manages the price risk associated with its fixed-priced commitments by either closely matching the offsetting physical purchase or sale of natural gas at fixed prices or through the use of NYMEX or Ice Clear Europe (ICE) futures, swap, and option contracts to lock in margins.
At March 31, 2014, LER’s unmatched fixed-price positions were not material to Laclede Group’s financial position or results of operations. LER’s NYMEX and ICE natural gas futures, swap, and option contracts used to lock in margins may be designated as cash flow hedges of forecasted transactions for financial reporting purposes.
The Company’s exchange-traded/cleared derivative instruments consist primarily of NYMEX, OTCBB, and ICE positions. The NYMEX and OTCBB is the primary national commodities exchange on which natural gas derivatives are traded. Open NYMEX/ICE and OTCBB natural gas futures and swap positions at March 31, 2014 were as follows:
 
Laclede Gas Company
 
Laclede Energy
Resources, Inc.
 
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
 
MMBtu
(millions)
 
Avg. Price
Per
MMBtu
NYMEX/ICE Open short futures positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
7.56

 
$
4.38

Fiscal 2015

 

 
1.58

 
4.46

Fiscal 2016

 

 
0.05

 
4.22

NYMEX/ICE Open long futures positions
 
 
 
 
 
 
 
Fiscal 2014
3.80

 
$
3.79

 
1.16

 
$
4.23

Fiscal 2015
0.94

 
3.84

 
0.88

 
4.35

Fiscal 2016

 

 
0.09

 
4.18

Fiscal 2017

 

 
0.02

 
4.28

ICE Open long basis swap positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
0.92

 
$
0.39

Fiscal 2015

 

 
0.16

 
0.39

Fiscal 2016

 

 
0.92

 
0.80

Fiscal 2017

 

 
0.16

 
0.80

ICE Open short basis swap positions
 
 
 
 
 
 
 
Fiscal 2014

 
$

 
4.86

 
$
0.02

Fiscal 2015

 

 
0.62

 
(0.09
)
OTCBB Open long futures positions
 
 
 
 
 
 
 
Fiscal 2014
9.53

 
$
4.00

 

 
$

Fiscal 2015
9.83

 
4.21

 

 

Fiscal 2016
0.55

 
4.24

 

 


At March 31, 2014, the Utility had 28.4 million MMBtu of other price mitigation in place through the use of NYMEX and OTCBB natural gas option-based strategies while LER had none.
Derivative instruments designated as cash flow hedges of forecasted transactions are recognized on the Consolidated Balance Sheets at fair value and the change in the fair value of the effective portion of these hedge instruments is recorded, net of tax, in other comprehensive income (OCI). Accumulated other comprehensive income (AOCI) is a component of Total Common Stock Equity. Amounts are reclassified from AOCI into earnings when the hedged items affect net income, using the same revenue or expense category that the hedged item impacts. Based on market prices at March 31, 2014, it is expected that approximately $1.0 million of pre-tax unrealized gains will be reclassified into the Statements of Consolidated Income during the next twelve months. Cash flows from hedging transactions are classified in the same category as the cash flows from the items that are being hedged in the Statements of Consolidated Cash Flows.

The Effect of Derivative Instruments on the Statements of Consolidated Income and Statements of Consolidated Comprehensive Income
 
Location of Gain (Loss)
Three Months Ended March 31,
 
Six Months Ended March 31,
(Thousands)
Recorded in Income
2014
 
2013
 
2014
 
2013
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Effective portion of gain (loss) recognized in OCI on derivatives:
 
 
 
 
 
 
 
NYMEX/ICE natural gas contracts
 
$
(3,508
)
 
$
(3,188
)
 
$
(5,163
)
 
$
(1,855
)
NYMEX gasoline and heating oil contracts
 
57

 
147

 
66

 
203

      Interest rate swaps
 

 
(4,549
)
 

 
(4,549
)
Total
 
$
(3,451
)
 
$
(7,590
)
 
$
(5,097
)
 
$
(6,201
)
Effective portion of gain (loss) reclassified from AOCI to income:
 
 
 
 
 
 
 
NYMEX/ICE natural gas contracts
Gas Marketing Operating Revenues
$
(4,655
)
 
$
302

 
$
(3,355
)
 
$
(1,661
)
 
Gas Marketing Operating Expenses
1,406

 
(318
)
 
1,226

 
(652
)
Sub-total
 
(3,249
)
 
(16
)
 
(2,129
)
 
(2,313
)
NYMEX gasoline and heating oil contracts
Gas Utility Other Operations and Maintenance Expenses
55

 
38

 
113

 
85

Total
 
$
(3,194
)
 
$
22

 
$
(2,016
)
 
$
(2,228
)
Ineffective portion of gain (loss) on derivatives recognized in income:
 
 
 
 
 
 
 
NYMEX/ICE natural gas contracts
Gas Marketing Operating Revenues
$
74

 
$
(87
)
 
$
(137
)
 
$
(412
)
 
Gas Marketing Operating Expenses
(10
)
 
(44
)
 
123

 
(129
)
Sub-total
 
64

 
(131
)
 
(14
)
 
(541
)
NYMEX gasoline and heating oil contracts
Gas Utility Other Operations and Maintenance Expenses
(84
)
 
(31
)
 
36

 
(132
)
Total
 
$
(20
)
 
$
(162
)
 
$
22

 
$
(673
)
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments *
 
 
 
 
 
 
 
Gain (loss) recognized in income on derivatives:
 
 
 
 
 
 
 
Natural gas commodity contracts
Gas Marketing Operating Revenues
$
13,922

 
$
1,745

 
$
12,255

 
$
775

 
Gas Marketing Operating Expenses

 

 

 

NYMEX/ICE natural gas contracts
Gas Marketing Operating Revenues
1,840

 
(1,679
)
 
3,830

 
(612
)
 
Gas Marketing Operating Expenses

 

 

 

NYMEX gasoline and heating oil contracts
Other Income and (Income Deductions) - Net
(3
)
 
13

 
10

 
46

Total
 
$
15,759

 
$
79

 
$
16,095

 
$
209


*
Gains and losses on Laclede Gas’ natural gas derivative instruments, which are not designated as hedging instruments for financial reporting purposes, are deferred pursuant to the Utility’s PGA Clause and initially recorded as regulatory assets or regulatory liabilities. These gains and losses are excluded from the table above because they have no direct impact on the Statements of Consolidated Income. Such amounts are recognized in the Statements of Consolidated Income as a component of Gas Utility Natural and Propane Gas operating expenses when they are recovered through the PGA Clause and reflected in customer billings.

Fair Value of Derivative Instruments in the Consolidated Balance Sheet at March 31, 2014
 
Asset Derivatives*
 
Liability Derivatives*
(Thousands)
Balance Sheet Location
Fair
Value
 
Balance Sheet Location
Fair
 Value
Derivatives designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Derivative Instrument Assets
$
915

 
Derivative Instrument Assets
$
773

 
Other Deferred Charges
207

 
Other Deferred Charges
1

NYMEX gasoline and heating oil contracts
Derivative Instrument Assets
49

 
Derivative Instrument Assets

Sub-total
 
1,171

 
 
774

Derivatives not designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Derivative Instrument Assets
3,166

 
Derivative Instrument Assets
347

 
Accounts Receivable – Other
4,467

 
Accounts Receivable – Other
3,811

 
Other Deferred Charges
3

 
Other Deferred Charges
7

OTCBB natural gas contracts
Derivative Instrument Assets
6,266

 
Derivative Instrument Assets
193

 
Other Deferred Credits
64

 
Other Deferred Credits
122

Natural gas commodity contracts
Derivative Instrument Assets
4,466

 
Derivative Instrument Assets
333

 
Other Deferred Charges
1,326

 
Other Deferred Charges
17

 
Other Current Liabilities
603

 
Other Current Liabilities
1,574

 
Other Deferred Credits
231

 
Other Deferred Credits
1,394

Sub-total
 
20,592

 
 
7,798

Total derivatives
 
$
21,763

 
 
$
8,572

 
 
 
 
 
 
Fair Value of Derivative Instruments in the Consolidated Balance Sheet at September 30, 2013
 
Asset Derivatives*
 
Liability Derivatives*
(Thousands)
Balance Sheet Location
Fair
Value
*
Balance Sheet Location
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Derivative Instrument Assets
$
2,222

 
Accounts Receivable - Other
$
440

 
Other Deferred Charges
22

 
Other Deferred Charges
11

NYMEX gasoline and heating oil contracts
Accounts Receivable - Other
105

 
Accounts Receivable - Other

Sub-total
 
2,349

 
 
451

Derivatives not designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Derivative Instrument Assets
950

 
Derivative Instrument Assets
100

 
Accounts Receivable - Other
1,434

 
Accounts Receivable - Other
3,455

 
Other Deferred Charges
32

 
Other Deferred Charges

OTCBB natural gas contracts
Other Current Liabilities
228

 
Other Current Liabilities
4,045

 
Other Deferred Credits
4

 
Other Deferred Credits
1,398

Natural gas commodity contracts
Derivative Instrument Assets
991

 
Derivative Instrument Assets
90

 
Other Deferred Charges
20

 
Other Deferred Charges
137

 
Other Current Liabilities
247

 
Other Current Liabilities
830

 
Other Deferred Credits
21

 
Other Deferred Credits
123

Sub-total
 
3,927

 
 
10,178

Total derivatives
 
$
6,276

 
 
$
10,629

Fair Value of Derivative Instruments in the Consolidated Balance Sheet at March 31, 2013
 
Asset Derivatives*
 
Liability Derivatives*
(Thousands)
Balance Sheet Location
Fair
Value
 
Balance Sheet Location
Fair
Value
Derivatives designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Accounts Receivable - Other
$
520

 
Accounts Receivable - Other
$
2,993

 
Other Deferred Charges
5

 
Other Deferred Charges

NYMEX gasoline and heating oil contracts
Derivative Instrument Assets
312

 
Derivative Instrument Assets

Interest rate swaps
Other Current Liabilities

 
Other Current Liabilities
4,549

Sub-total
 
837

 
 
7,542

Derivatives not designated as hedging instruments
 
 
 
 
NYMEX/ICE natural gas contracts
Derivative Instrument Assets
10,862

 
Derivative Instrument Assets
339

 
Accounts Receivable - Other
2

 
Accounts Receivable - Other
457

Natural gas commodity contracts
Derivative Instrument Assets
2,943

 
Derivative Instrument Assets
227

 
Other Current Liabilities
62

 
Other Current Liabilities
787

NYMEX gasoline and heating oil contracts
Derivative Instrument Assets
10

 
Derivative Instrument Assets

Sub-total
 
13,879

 
 
1,810

Total derivatives
 
$
14,716

 
 
$
9,352


*
The fair values of Asset Derivatives and Liability Derivatives exclude the fair value of cash margin receivables or payables with counterparties subject to netting arrangements. Fair value amounts of derivative contracts (including the fair value amounts of cash margin receivables and payables) for which there is a legal right to set off are presented net on the Consolidated Balance Sheets. As such, the gross balances presented in the table above are not indicative of the Company’s net economic exposure. Refer to Note 7, Fair Value Measurements, for information on the valuation of derivative instruments.

Following is a reconciliation of the amounts in the tables above to the amounts presented in the Consolidated Balance Sheets:
(Thousands)
March 31, 2014
 
September 30, 2013
 
March 31, 2013
Fair value of asset derivatives presented above
$
21,763

 
$
6,276

 
$
14,716

Fair value of cash margin receivables offset with derivatives

 
1,765

 
2,928

Netting of assets and liabilities with the same counterparty
(7,094
)
 
(4,739
)
 
(11,618
)
Total
$
14,669

 
$
3,302

 
$
6,026

 
 
 
 
 
 
Derivative Instrument Assets, per Consolidated Balance Sheets:
 
 
 
 
 
Derivative instrument assets
$
13,560

 
$
3,291

 
$
6,021

Other deferred charges
1,109

 
11

 
5

Total
$
14,669

 
$
3,302

 
$
6,026

 
 
 
 
 
 
Fair value of liability derivatives presented above
$
8,572

 
$
10,629

 
$
9,352

Fair value of cash margin payables offset with derivatives
655

 
6

 
7,540

Netting of assets and liabilities with the same counterparty
(7,094
)
 
(4,739
)
 
(11,618
)
Total
$
2,133

 
$
5,896

 
$
5,274

 
 
 
 
 
 
Derivative Instrument Liabilities, per Consolidated Balance Sheets:
 
 
 
 
 
Other Current Liabilities
$
1,196

 
$
4,400

 
$
5,274

Other Deferred Credits
937

 
1,496

 

Total
$
2,133

 
$
5,896

 
$
5,274

Additionally, at March 31, 2014, September 30, 2013, and March 31, 2013, the Company had $3.8 million, $3.2 million, and $1.3 million, respectively, in cash margin receivables not offset with derivatives, that are presented in Accounts Receivable - Other.